Please select your location and client type

Real assets
Smart cities

New technologies that would once have seemed the stuff of science fiction fantasy are quickly becoming reality; in the process transforming cities and creating investment opportunities.

Tower 42 was the City of London’s first skyscraper. Plans for the building, formerly known as the Natwest Tower, were first unveiled in 1964 but the prospect of such an edifice piercing London’s skyline proved so controversial that the foundations were not laid until 1970 and construction took a further 10 years.

Today, the City’s gleaming pillars of enterprise shoot upwards at an astonishing pace and have proliferated in such numbers that anyone returning after a few years’ absence would be amazed by the change. A time traveller from 50 years ago, when bowler hats and pinstripes were commonplace and St Paul’s Cathedral had only recently been supplanted as London’s tallest building, would think they were in an alien land.

If anything, the pace of change is likely to quicken. However, we have a good idea of how cities of the future will look because many of the transformational technologies that will influence their development are already in use.

Self-driving and electrical vehicles (EVs), for example, are likely to have a major impact and will transform city dwellers’ attitude to cars. Rather than being status symbols, cars will be commoditised.

“Many won’t bother to learn to drive or own a car but will simply rely on Uber-like apps to get from A to B. Those who do own cars will regard them chiefly as a means of earning money, either by feeding energy back in the grid at times of peak demand or by renting them out,” says Isaac Vaz, associate director, infrastructure equity at Aviva Investors.

If Vaz is right, this trend will have significant implications for the way cities look. Parking spaces, car parks and petrol stations could disappear; to be replaced by green recreational areas, housing and shops. The air should be far cleaner as the petrol engine is phased out and wind and solar energy power tomorrow’s world.

Singapore is among the global leaders in the drive towards smart city status and has launched initiatives across various areas, including energy efficiency and water usage, health and transport.

Thousands of sensors in some neighbourhoods monitor energy and water usage as well as waste production in individual apartments. Residents are provided with feedback that can help them use less water and energy, and so save money. Meanwhile, the same data should enable the authorities to improve the planning, design and maintenance of public housing estates.

To improve the efficiency of the city state’s roads, the government is calling for satellite-navigation systems to be installed in all vehicles. These will supply data to show exactly where every car is as at any given time across the island, allowing for better traffic management.1

Elsewhere, some African countries have ambitious plans to develop smart cities, reflecting the rapid pace of urbanisation expected in the coming decades. Kenya, for example, has already begun building a $9 billion new “silicon” city called Konza, located south of Nairobi and heavily-influenced by existing new cities such as Cyberjaya in Malaysia and Cyber City in Mauritius.2

Stepping ahead

The smart cities of the future could incorporate novel ways of generating power. These include capturing the kinetic energy from footsteps. This may sound futuristic, but the technology has already been developed by Pavegen of the UK. One footstep generates around five watts of electrical power, according to the company.3

“Tiles could be placed in Bank Station using the energy from tens of thousands of marching commuters to power street lighting,” says Vaz.

Moreover, the footfall data produced by the “smart streets” in which the tiles are installed can provide significant insights into consumer behaviour in shopping centres, for example. “Retailers could use this intelligence to gauge the effectiveness of advertising or maximise the efficient use of signage to influence where people go,” adds Vaz.

In a similar vein, electrical vehicles could be charged as they drive around the city’s streets. Qualcomm, the US semiconductor and telecommunications multinational, has already demonstrated the technology at a test track in Versailles, France.4 As with Pavegen’s technology, these roads will produce an immense amount of “Big Data” that could prove useful in a myriad of ways, including the development of self-driving cars.

Vaz acknowledges there are some drawbacks, not least the cost and inconvenience of installing charging systems under roads. However, there are many advantages too.

“Dynamically-charged cars could theoretically run forever, meaning batteries could be smaller and lighter, and cars could be cheaper to run. Users would not need to regularly plug in their cars, eliminating the need for hundreds of thousands of charging points in Europe alone,” Vaz adds.

The BIM effect

While it may take years before these technological wonders become commonplace, cities are already being designed and built in a completely different manner from just 10 years ago. Planners, architects and investors no longer need to pore over rolls of complex blueprints but can use virtual reality created by laser scanning to see how the final building will look.

They can also watch construction develop in 3D with accompanying data, and projections of when the building will be completed and its final cost, thanks to Building Information Modelling (BIM), which produces a digital representation of a construction project.

BIM helps eliminate errors, sometimes only discovered once construction is underway; speeds up the building process; cuts construction and operational costs; shows how a project should perform when built; and helps manage the building far more optimally than is the case today, says Dan Bentley, a partner at construction and property consultancy Core Five.

It can also de-risk a project, according to Bentley. “BIM coordinates the different disciplines that supply services to a building, such as architects, structural and electrical engineers,” he says. “This ’clash detection‘ could be done previously but was time consuming and subject to human error, while contractors would add a premium to take on the cost of any risk, inflating the overall cost of a project.”

Footballers on a pitch in the Morro da Mineira favela in Rio de Janeiro can play well into the night thanks to floodlights powered by 200 kinetic tiles buried under the astroturf. As players run on the pitch, they cause electric-magnetic induction generators to produce electricity. Source: Pavegen.

Many won’t bother to learn to drive or own a car but will simply rely on Uber-like apps to get from A to B. Those who do own cars will regard them chiefly as a means of earning money, either by feeding energy back in the grid at times of peak demand or by renting them out

Indeed, the potential for cost savings is so great that the UK government now requires BIM be used in any public sector-funded project as a means of reducing capital costs by 20 per cent.5

Coates believe the government’s initiative is helping to make the UK a global leader in the application of BIM. “The UK has produced a series of documents relating to BIM to provide a standardised framework, whereas other countries have adopted a piecemeal approach,” he says. “Indeed, the UK’s documents are expected to become an international standard for BIM adoption on projects.”

Sandra Reis, BIM manager at construction and engineering firm Costain, concurs with that view; explaining that the UK and northern European countries have generally been much quicker to adopt BIM than their southern counterparts.

Developments in Singapore have also impressed Reis. While BIM is usually applied to individual buildings, the city state has even greater ambitions. The government’s “Smart Nation” initiative aims to model the entire city in 3D.

Meanwhile, BIM is being used to change the face of other Asian cities. The Shanghai Tower, China’s tallest building, uses BIM to control everything from energy use to fire alarms.

Vaz believes the use of BIM brings significant advantages throughout a building’s lifecycle, including at the design phase. “If you are planning a new underground line or a new building in a city such as London, you inevitably have to take account of the position of existing infrastructure on the ‘as built’ drawings,” he says. “These are the original design drawings, which have been revised to reflect any changes made in the field. Yet often they are not updated, so a building may actually be 10 metres to the left of where it is supposed to be, a deviation that can have a major impact on where a new development should be sited.”

By contrast, BIM provides an accurate guide designers and architects can use for new projects. BIM also shows how the building will behave over time; allowing further adjustments to be made that could improve its sustainability.

Vaz cites the £4 billion-plus Thames Tideway Tunnel as an example of how BIM can save money during the construction process. The tunnel, a ‘super sewer’ built under the tidal section of the River Thames, will stop sewage overflowing into the river. To create the tunnel, a large amount of soil must be removed by barge. Timing when the barges can dock is critical given the tide moves by around two metres. Vaz says that BIM allows the planners to know exactly when the barges should arrive, boosting efficiency and avoiding project delays.

Operational efficiencies

Managing projects in an efficient manner can also bring considerable economic and environmental savings. Indeed, the operational phase of a building is the main contributor to a building’s lifecycle cost, according to the British Institute of Facilities Management, while the lifecycle cost is estimated to be three times that of the construction cost.6

The combined heat and power company ENER-G estimates that “by having historical design data instantly available, up to 15 per cent can be saved on maintenance time and sometimes may remove the need for costly site visits”.7

The construction industry has a well-established reputation for being resistant to change and being less efficient in terms of its processes when compared with, for example, the manufacturing and aerospace industries, says Coates. Nonetheless, he believes BIM will become increasingly widespread and the norm for many projects in the next five years.

Eye in the sky

New technology is also changing the way asset management firms monitor their investments in physical assets, such as infrastructure and commercial property. Vaz points to the increasing use of drones as an example.

“Most of our asset managers are based in London, but we are invested in projects all over the country,” he says. “Drones with cameras can provide a wealth of information that could only otherwise be accessed by flying in one of our managers. So we can use drones to check how the construction of a project is developing, comparing real-time images with the construction plans. We could use a drone to check for rust on turbines, or, by analysing a heat map captured by the drone, determine whether panels in a solar park are operating efficiently.”

According to Vaz, drones could also help cities use energy more efficiently by creating heat maps that show where energy is being wasted and where it is most needed.

“If we can find a way of connecting the two, capturing waste heat and transferring it to areas of high energy demand, the boost to energy efficiency would be considerable,” he says.

Escape from the country

In 2016, an estimated 54.5 per cent of the world’s population lived in urban settlements, according to the UN. It projects that by 2030 urban areas will house 60 per cent of people8, which means over a billion more people will be living in cities than today.

Consequently, the development of smart cities that can deliver environmental and quality of life benefits could make a major contribution to human progress and well being. Moreover, just as new technology allows us to see what a future building will look like; we can already model the outlines of the cities of the future.

'Singapore is striving to be the world’s first `smart city’’, endgadget, March 2016

Smart cities: the investment opportunity

The trillions of dollars1 that will be invested in smart buildings and cities and their accompanying infrastructure in the coming years will create huge opportunities for real estate and infrastructure investors.

Fixed income is the traditional means by which governments, local authorities and corporations have financed real estate and infrastructure investment, and bonds will undoubtedly continue to play a key role. Green bonds, used for environmentally-friendly purposes, are certainly playing an increasingly-important role in the US municipal bond market, and are attracting the interest of other countries. Last November, Ottawa became the first municipality in Canada to offer a green bond, raising $79.6 million from a 3.25 per cent bond that matures in November 2047. The proceeds will be used to finance light rail transit capital work.

Smart cities can offer advantages over traditional infrastructure investment, according to Deloitte, because they ”can comprise multiple sectors and be adapted for use beyond the realm of traditional infrastructure functions”.2

Smart street lighting provides an example. These lights are equipped with environmental sensors to monitor air pollution, temperature and parking spaces, and supply a constant stream of rich data on environmental and social performance. Deloitte points out the city “can monetize the data by charging access fees for any third-party developers who wish to develop applications using this data (such as a parking space app)”.

There are also social benefits associated with the investment. Gunshot detection using audio sensors in the lights can help accelerate response time to violent crime.

So while traditional street lighting project revenue streams are realised through energy cost savings alone, this “is increased by a multiplier factor because of the economic value of the data,” argues Deloitte.

As such, smart city infrastructure investment should result in the reallocation of risk and reward between the public and private sectors, according to Deloitte. That “should lead to new partnership models for front-end investment and revenue sharing, including pay-for-performance related to service improvements or access to services”.

Meanwhile, Vaz believes the development of smart cities already offers a number of opportunities for infrastructure investors. They include investing in fibre optic networks, systems that create energy from waste, while the next few years could see massive investment in smart metre networks that allow consumers to feed energy back into the grid from their cars or solar panels, and in the highways that allow EVs to charge as they drive.

The use of BIM in buildings and cities also brings tangible benefits to real estate investors, says Chris Urwin, head of global real estate research at Aviva Investors.

“The technology could be used to enhance the appeal of buildings to tenants, with positive implications for rents and tenancy renewals,” Urwin explains. “Organisations are increasingly interested in promoting wellness issues and productivity, to support their prospects of attracting and retaining the best talent. Consequently, the ability to modify factors such as temperature, lighting and air quality to best suit individuals holds considerable appeal.”

There are also environmental benefits. The technology can, for example, improve energy-efficiency and reduce waste. These ‘smart’ buildings may not be commonplace yet, but Urwin says it is possible to imagine a time when they will be.

Meanwhile, smart cities are throwing up a myriad of opportunities for stock investors; ranging from the companies developing cutting-edge technology to those mega enterprises seeking to exploit Big Data in a host of activities ranging from transport and advertising to health.

Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at January 21, 2018. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

The apparent breakdown in the Phillips curve has left economists puzzled and created a dilemma for policymakers. However, the relationship between inflation and employment remains very much alive, meaning the Fed has a lot more work to do yet.